New Opportunities in the Face of Uncertainty: Recapping BNEF 2017

Mercatus joined Bloomberg New Energy Finance for their signature Future of Energy Summit this past April in New York City. Now in its tenth year, this year’s show was the largest and most diverse yet, with over 1,000 attendees present from across the energy sector, including politicians, regulators, investors and more. New participation signalled major growth, given that just a few years ago the summit was still considered a ‘new energy’ or renewables-only conference. In addition, new representation in natural gas, storage, IoT and energy trading proved just how advanced and diverse our industry has become.

This year’s event had a new focus on a variety of new and controversial subjects. Policy and regulation, consumer demand, and emerging technologies and regions took on an increased role in light of the recent major changes in political regimes and market dynamics. With many new changes yet to come, this was perhaps the most important view into of the future of energy that we have seen to date. As a sponsor of this year’s event, here are our top takeaways.

Confronting Oversupply in “the Age of Plenty”

At the BNEF EMEA Summit in London last October, Michael Leibreich characterized the global energy industry as being in “the age of plenty, the age of competition.” This still holds true today, as declining prices in solar, and both onshore and offshore wind are dropping low enough to compete with coal and natural gas. This competition has resulted in oversupply, which Leibreich characterized as “the age of plenty, on steroids.” Globally demand for new generation is decreasing, so much so that BNEF saw clean energy investment fell by 18% in 2016. However, renewables are still projected to grow in the long run, and investments in energy efficiency, battery storage and electric vehicles are on the rise, with the costs of each drastically coming down. All of these factors, paired with declining natural gas prices, are increasingly pushing coal out. In the long run, we’ll continue to see how renewables and efficiency influence the evolving structure of global power supply and demand.

New Investments in Advanced Technologies and Emerging Markets

Given the global oversupply of power, the need to incorporate new electricity into the grid has led to a surge in new investments. Increasingly we’re seeing a new emphasis on the need for increased capacity, in which energy efficiency, battery storage and new infrastructure play a central role. Given the declining costs in batteries, which are down over an astounding 75%, electric vehicles will account for over 8% of power demand by 2040. This means that over the next 10+ years, we are likely to see electric vehicles overtake the automobile market.

With new technologies attracting new investment dollars, emerging markets are still on the rise. According to BNEF, the Asia-Pacific region is expected to attract 50% of all new investment worldwide. Despite slower growth in the near term as they confront oversupply, China is expected to be the most important center of activity over the next 25 years as it transitions away from coal-fired generation plants. Increasing demand for electricity coupled with power market reforms in Mexico present new opportunities for wind and solar, while Latin America still struggles with oversupply and political instability.

Uncertainty in the Face of Political Change

With the new political administration in place, America’s position on environmental regulation and renewable generation is very likely going to change. With efforts in place to repeal the Clean Power Plan, it’s clear that the policies and incentives that renewables have enjoyed over the last decade will not be sustained. In his monologue at the summit, Secretary of the Department of Energy, Rick Perry, stated that the Trump administration will take an “all of the above” approach to energy, which includes the mining and drilling of fossil fuels. He also made clear that political agendas would not be “tilted” to favor certain technologies over the other. However, even without incentives and policies in place, renewables are expected to continue to thrive. Tea Party co-founder and renewable energy advocate, Debbie Dooley, reiterated that regulation becomes less of a factor as the “[economic] genie is out of bottle” with renewables, meaning that their price competitiveness is not dependent on federal subsidies. While these incentives were certainly beneficial, utility executives themselves agreed that their expiration will not have a negative impact. However, rising interest rates and lower tax rates are more likely to create power pricing uncertainty in the future.

Transforming Business Models in a Growing Industry

With the rise of renewables and the onset of distributed generation, power producers are experiencing unprecedented challenges on multiple fronts. Customers are now demanding clean energy options while still paying the lowest prices, and utilities are working to meet these demands while adhering to environmental regulations. All of this becomes increasingly difficult as power pricing structures become more complex, and the uncertain future of tax equity affects supply and demand. As energy companies incorporate more technologies and solutions, their businesses have become increasingly complex and costly. As one executive noted, investors expect utilities to transition to renewables while still continuing to deliver earnings and growth.

As a result, business model transformation and digital innovation have taken a stronger priority. The role of IoT and digital platforms are increasingly becoming important as companies look to reduce costs and overhead while still maintaining growth. “In distributed generation, you absolutely cannot scale without a strong IT platform,” explained Haresh Patel, who spoke to the importance of digitalization on one of the technology panels. While the onset of new technologies and changing market dynamics are making it increasingly difficult for business to sustain, the ability to be flexible and to take advantage of new opportunities is crucial – whether you’re a small IPP or a large regulated utility. Having a digital strategy in place is critical to achieving this, as streamlined business processes will better allow them to assess new opportunities in the market and increase their capacity. Digital solutions will also better ensure compliance, mitigate risk and meet investor obligations. In the long run, the businesses that have a strong digital framework in place will help them to scale and adapt to the ever-changing market dynamics that we’re continuing to see into the future.

It was evident from the New York Summit that the clean energy sector has come a long way in terms of influence. From advances in technology, financing and digital innovations, the clean tech sector is well on it’s way to becoming a mature asset class. However, there is still a ways to go in terms of thinking and innovation, as Michael Leibreich pointedly said, “In my view, America has never not been great. Businesses must continue to develop and deploy great technologies.” Despite the changing market dynamics or challenging political forces, the sector must continue to brace itself in the face of adversity. The energy companies that are proactive, strategic and innovative will be well positioned for success, no matter what comes their way.